Webinar Recap: Buying or Selling your Business - Keys to a Successful Transaction

Retail and home sales aren’t the only transactions on the rise in the wake of COVID. A recent survey of business owners found that 4.5 million businesses plan to transition in the next 10 years.

Three factors driving this trend include:

1. Business owners aging further into or toward retirement – the youngest GenXers have just crested 40

2. An anticipated rise in interest rates

3. Discussion of capital gains tax rate increases at the federal and state level

Our March webinar reviewed the basic elements of business transition. This month, we took a deeper dive into buying and selling a business.

Reasons to Sell Your Business

There are several reasons to put your business on the market. The most common reason is owner retirement. When there’s no family member or employee to pass the business onto and/or the owner wants a smooth and gradual transition out of the business, many turn to the marketplace. Other factors include:

• The best interest of the business

• Market conditions indicate a high valuation

• Someone makes you an offer

• Lease expiration is approaching

• Health issues or death

• Divorce or partnership dissolution

Why You Should Consider a Main Street or Middle Market Business Broker

Buying or selling a business is a complex transaction with a lot of moving parts. Besides price, type of transaction (stock or asset) and financial terms (cash, seller promissory note, earn-out, etc.), negotiated components of business sale transactions also include:

• The transition period for the seller: paid, unpaid, employee, consultant, virtual, etc.

• Non-disclosure and non-compete agreements

• Tax considerations, including allocation

• Treatment of key employees in the sale

• Real estate: leases, personal guarantees, etc.

An experienced Main Street or Middle Market Business Broker also helps you identify likely buyers outside of your family and employee base, such as strategic partners, financial buyers, entrepreneurs and lifestyle business buyers. Working with a broker ensures your anonymity, too. When you do it yourself, you may lose customers, employees and vendors, which will have a detrimental impact. Brokers can create a robust marketplace for your business sale without divulging details that make it easy to identify. These private party sales involve only parties who sign NDAs and have the power to negotiate in good faith and close the deal.

What Goes Into a Business Valuation

Valuing your business appropriately is a sophisticated and nuanced process. It starts with EBITDA, what ownerships earn in all forms, including salary, benefits, profit-sharing and discretionary expenses. That’s straightforward enough.

But the second component requires a deep knowledge of the business marketplace – something most buyers and sellers simply don’t possess. Brokers, on the other hand, can determine the unique aspects of your product, customers, location and estimate market demand – what buyers are willing to pay. They can also use these same tactics to help buyers find good opportunities and make successful offers.

When You Should Start Planning to Sell Your Business

Businesses aren’t highly liquid so it takes time to sell them – from 3 months to a year. But even if you’re not quite ready to hit the market, meet with brokers to do a trial valuation so you understand what it will take to be market-ready. There’s also a transition time that, depending on negotiated terms, can last from a few months to several years.

If you're leasing, you may want to time your sale for a year or two before the end of your lease term. This may incentivize the landlord to execute a new long-term lease and remove the owner as a personal guarantor.

Additionally, buyers and sellers should explore the impact of possible changes to interest rates and state and federal tax codes. Consult with your CPA and wealth advisor to understand the implications and decide if the time is right to buy or sell.

Thinking about buying or selling a small business? Email us for more information on legal considerations. And if you don’t know an experienced business broker, CPA or wealth advisor, we can recommend trusted professionals we work with.

 You can find the full webinar video below.